How the Grinch stalled the ‘Santa rally’

AnoraMahmudova

The Santa Rally, known to come to Wall Street in the last two weeks of the year, has a big obstacle — a sticky 2,100 level on the S&P 500.

The 2,100 level on the S&P 500
SPX, +0.01%
had such a strong gravitational pull that the index crossed it 38 times in 2015, according to FactSet.

The index is down 0.8% for the month and nearly flat for the year, as of Tuesday.

With the exception in August and September, when the S&P fell more than 12% before recovering, the index has generally stayed quite close to that level.

FactSet

Some traders called that mark “the magnet” or ‘the glue,” while the more technically minded call it a “support” when stocks are falling and “resistance” when the market is moving in the other direction.

Technically, the Santa rally begins two days before Christmas and lasts through the end of the year, according to Ryan Detrick, market strategist for Kimble Charting Solutions.

December generally tends to be a positive month. Since 1950, the S&P 500 rose three out of four times, with an average gain of 1.7%.

Ryan Detrick

In 18 of the past 20 years, the period from Nov. 20 and into the year end has been positive for large-cap and small-cap stocks, according to Jeff Saut, chief investment strategist at Raymond James, who does not like to short the market during this month.

“Santa tends to come to Wall Street in most years, which is why one of my mantras is, ‘It is hard to put stocks down during the ebullient month of December,’” Saut wrote in an email.

One reason December is usually a positive month for stocks has to do with a Wall Street habit known as window dressing — mutual funds rush to buy stocks that have done well so they can show their investors in their year-end statements that they own the year’s winners.

By the same token, investors are likely to sell their money-losing stocks to take advantage of tax-loss provisions. The effect is that stocks with higher momentum continue to get more expensive, while battered stocks are sold and their prices continue to slide.

The overall impact on the market depends on how big the losers and winners are.

Apart from the 2,100 level there are a few other factors that might prevent the Santa coming to town. Sam Stovall, U.S. equity strategist at S&P Capital IQ, in emailed notes, wrote that the 8.5% gain in October was likely to suppress the Santa rally.

“A strong October did tend to suppress the surge associated with a Santa Claus rally. Indeed, each minimum increase in the price rise for October reduced the average rest of year price gain and frequency of advance, with the worst reading seen after a 7% gain in October.”

Market participants are also concerned with narrowing market breadth — S&P 500 gains have come from fewer but bigger companies and heightened volatility, which usually forewarn of a larger pullback.

Such a pullback until the Federal Reserve meeting, scheduled for Dec 15-16 could potentially set the S&P 500 for a nice rebound rally, but that would depend on what the Fed does.

If the central bank opts for a “dovish hike” — a 25 basis point increase with a lot of reassurance that the consequent hikes would be far and few in between, the stocks may indeed rally.

But ending the year at or near 2,100 would mean that the Grinch still managed to stall Santa.

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